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The Relative Efficiency of Automatic and Discretionary Industrial Aid
Get PDFFor the last two decades, the primary instruments for UK regional policy have been
discretionary subsidies. Such aid is targeted at “additional” projects - projects that would not have been implemented without the subsidy - and the subsidy should be the minimum necessary for the project to proceed. Discretionary subsidies are thought to be more efficient than automatic subsidies, where many of the aided projects are non-additional and all projects receive the same subsidy rate. The present paper builds on Swales (1995) and Wren (2007a) to compare three subsidy schemes: an automatic scheme and two types of discretionary scheme, one with accurate appraisal and the other with appraisal error.
These schemes are assessed on their expected welfare impacts. The particular focus is the
reduction in welfare gain imposed by the interaction of appraisal error and the
requirements for accountability. This is substantial and difficult to detect with
conventional evaluation techniques
China´s new labour contract law: no harm to employment?
Get PDFIn January 2008, China imposed a new labour contract law. This new law is the most significant reform to the law of employment relations in mainland China in more than a decade. The paper provides a theoretical framework on the inter-linkages between labour market regulation, option
value and the choice and timing of employment. All in all, the paper demonstrates that the Labour
Contract Law in it´s own right will have only small impacts upon employment in the fast-growing Chinese economy. On the contrary, induced increasing unit labour costs represent the real issue and may reduce employment.
Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico
Get PDFThis paper shows that introducing weak property rights in the standard real
business cycle (RBC) model can help to explain economic fluctuations. This is motivated by the empirical observation that changes in institutions in emerging markets are related to the evolution of the main macroeconomic variables. In particular, in Mexico, the movements in productivity in the data are associated with changes in institutions, so that we can explain
productivity shocks to a large extent as shocks to the quality of institutions. We find that the model with shocks to the degree of protection of property rights only - without technology shocks - can match the second moments in the data for Mexico well. In particular, the fit is better than that of the standard neoclassical model with full protection of property rights
regarding the auto-correlations and cross-correlations in the data, especially those related to labor. Viewing productivity shocks as shocks to institutions is also consistent with the stylized fact of falling productivity and non-decreasing labor hours in Mexico over 1980-1994, which is a feature that the neoclassical model cannot match
Political Risk, Economic Integration, and the Foreign Direct Investment Decision
Get PDFIn this paper we analyse the impact of policy uncertainty on foreign direct investment strategies. We also consider the impact of economic integration upon FDI decisions. The paper follows the real
options approach, which allows investigating the value to a firm of waiting to invest and/or disinvest, when payoffs are stochastic due to political uncertainty and investments are partially reversible.
Across the board we find that political uncertainty can be very detrimental to FDI decisions while economic integration leads to an increasing benefit of investing abroad
Multinational Firms’ Heterogeneity in Tax Responsiveness: the Role of Transfer Pricing
Get PDFIn this paper we show that the ability of multinational firms to manipulate transfer
prices affects the tax sensitivity of foreign direct investment (FDI). We offer a model of international capital allocation where firms are heterogeneous in their ability to manipulate transfer prices. Perhaps paradoxically, we show that the ability to shift profits can make parent companies' investment more sensitive to host-country tax rates, as long as investors expect fisscal authorities to use price and profit detection methods. We then offer a comprehensive empirical study to test our predictions in the case of Japanese FDI. We exploit the finding that the unobservable ability to manipulate transfer prices is correlated with whole ownership of a±liates and R&D expenditure. Based on country, parent firm and sector characteristics, we estimate an investment equation on a sample of 3614 Japanese affiliates in 49 emerging countries. We obtain a greater semi-elasticity of investment to the statutory tax rate in a±liates that are wholly-owned and that have R&D intensive parents. We interpret these results as indirect evidence that abusive transfer pricing is one of the determinants of FDI activity
Which Inequality? The Inequality of Endowments Versus the Inequality of Rewards
Get PDFSociety often allocates valuable resources - such as prestigious positions, salaries,
or marriage partners - via tournament-like institutions. In such situations, inequality
affects incentives to compete and hence has a direct effect on equilibrium
choices and hence material outcomes. We introduce a new distinction between
inequality in initial endowments (e.g. ability, inherited wealth) and inequality of
what one can obtain as rewards (e.g. prestigious positions, money). We show
that these two types of inequality have opposing effects on equilibrium behavior
and wellbeing. Greater inequality of rewards tends to hurt most people — both
the middle class and the poor, — who are forced into greater effort. In contrast,
greater inequality of endowments tends to benefit the middle class. Thus, which
type of inequality is considered hugely affects the correctness of our intuitions
about the implications of inequality
The intra-industry trade for a high-income country: new empirical evidence for Italy
Get PDFThis paper examines the determinants of Italian intra-industry trade in horizontally and vertically differentiated
products, using a dataset which eliminates the effects linked to the hypothesis of homogeneity both between
countries - when specific industry characteristics are analysed - and between sectors - within the same country. In
this way, within limits, we have tried to address an issue raised by Greenaway et al. in 1999 which, in the light of
the current state of the literature on intra-industry trade, does not seem to have been explicitly dealt with.
Our paper highlights how strong the impact of this hypothesis could be in the analyses of the determinants of intraindustry
trade in the case of Italy
Export-market dynamics and the probability of firm closure: Evidence for the UK
Get PDFThis study presents the first empirical analysis of the determinants of firm closure in the UK with an emphasis on the role of export-market dynamics, using panel data for
a nationally representative group of firms operating in all-market based sectors during
1997-2003. Our findings show that the probability of closure is (cet. par.)
significantly lower for exporters, particularly those experiencing export-market entry and exit. Having controlled for other attributes associated with productivity (such as size and export status), the following factors are found to increase the firm’s survival prospects: higher capital intensity and TFP, foreign ownership, young age, displacement effects (through relatively high rates of entry of firms in each industry), and belonging to certain industries. Interestingly, increased import penetration (a proxy for lower trade costs) leads to a lower hazard rate for exporting entrants and continuous exporters, whilst inducing a higher hazard rate for domestic producers or those that quit exporting
A computable general equilibrium analysis of the relative price sensitivity required to induce rebound effects in response to an improvement in energy efficiency in the UK economy
Get PDFIn recent years there has been extensive debate in the energy economics and policy
literature on the likely impacts of improvements in energy efficiency. This debate has focussed on the notion of rebound effects. Rebound effects occur when improvements
in energy efficiency actually stimulate the direct and indirect demand for energy in
production and/or consumption. This phenomenon occurs through the impact of the
increased efficiency on the effective, or implicit, price of energy. If demand is
stimulated in this way, the anticipated reduction in energy use, and the consequent
environmental benefits, will be partially or possibly even more than wholly (in the case
of ‘backfire’ effects) offset. A recent report published by the UK House of Lords
identifies rebound effects as a plausible explanation as to why recent improvements in
energy efficiency in the UK have not translated to reductions in energy demand at the macroeconomic level, but calls for empirical investigation of the factors that govern the
extent of such effects.
Undoubtedly the single most important conclusion of recent analysis in the UK, led by the UK Energy Research Centre (UKERC) is that the extent of rebound and backfire
effects is always and everywhere an empirical issue. It is simply not possible to
determine the degree of rebound and backfire from theoretical considerations alone,
notwithstanding the claims of some contributors to the debate. In particular, theoretical analysis cannot rule out backfire. Nor, strictly, can theoretical considerations alone rule out the other limiting case, of zero rebound, that a narrow engineering approach would imply.
In this paper we use a computable general equilibrium (CGE) framework to investigate
the conditions under which rebound effects may occur in the Scottish regional and UK
national economies. Previous work has suggested that rebound effects will occur even where key elasticities of substitution in production are set close to zero. Here, we carry out a systematic sensitivity analysis, where we gradually introduce relative price
sensitivity into the system, focusing in particular on elasticities of substitution in
production and trade parameters, in order to determine conditions under which rebound
effects become a likely outcome. We find that, while there is positive pressure for
rebound effects even where (direct and indirect) demand for energy is very price
inelastic, this may be partially or wholly offset by negative income and disinvestment
effects, which also occur in response to falling energy prices
Labour Market Imperfections, International Integration and Selection
Get PDFAlthough a large body of literature has focused on the effects of intra-firm differences on export performance, relatively little attention has been
devoted to the interaction between firms' selection and international performance and labour market institutions - in contrast with the centrality of the latter to current policy and public debates on the implications of economic globalisation for national policies and institutions. In this paper, we study the effects of labour market unionisation on the process of competitive selection between heterogeneous firms and analyse how the interaction between the two is affected by trade liberalisation between
countries with different unionisation patterns